The November soybeans futures contract has experienced a nice pop since the beginning of September. The contract has increased from roughly $9.33 on August 31 to Monday’s closing price of just above $9.69.
Several bullish factors have supported prices in recent weeks, mainly weather, in addition to the total disbelief of the September WASDE report. Some appear convinced that Hurricanes Harvey and Irma will help drive yields down from their expected record high.
But that would require the USDA to help farmers… and the last two WASDE reports have offered little, if any relief to the support soybeans prices. The most recent showed a half-bushel increase from August’s yield expectations. The 49.9 bushels per acre number was well above analysts’ average pre-report forecast of 48.7.
While the chatter here in the states centers on U.S. yields, there’s a far more bearish factor that will affect prices heading into the fall. We’ve discussed it before.
But now a perfect storm is forming… and it will affect U.S. growers in the months ahead.
All Eyes on South America
Argentina is expecting yet another large crop in the 2017/18 season.
Now, we’re not going to see record crop like we did in the 2014/15 year, but 55 million metric tonnes isn’t anything to sneeze at.
With planting set for October, many are already projecting expectations for what farmers will do next year. Some agricultural economists have said that Argentina will decrease its production by up to 7% and grow even more corn if prices remain at current price levels.
We’ve heard this one before. Back in June 2016, Argentina’s Agro-industry minister Ricardo Buryaile predicted that soybean acreage would decline while its corn acreage would surge by 20%.
“We are going to have less area with soybeans, which means that the 60 million tonnes harvest could drop to 55 million tons,” he said last year.
The soybean figure came in around 56 million tonnes.
Rosario has forecasted 52 million metric tonnes, while the USDA has it set for 57 million metric tonnes. Given that Argentina comprises about 19% of global production, they have our attention.
So, is another 7% decline bullish enough news to push global prices higher?
Not if we focus somewhere else in South America.
We need to look to their neighbor to the north for a clearer understanding.
The Bearish Case of the Brazilian Soybeans Boom
Brazil’s soybean crop for 2017/2018 is already underway.
Producers across Parana have already received the go-ahead to begin planting. Once the “sanitary vacuum” ended on September 10, it was full speed ahead in the region.
Dry weather has delayed planting in some regions of Brazil, but the short-term conditions aren’t enough to sway the bearish sentiment fueled by other key factors. Keep in mind that it was also dry last year when seeding of soybeans started.
Let’s take a look at the bearish factors affecting Brazilian crop – and the broader soybean complex around the globe.
Brazilian Soybeans Acreage Increasing
More corn in the region has meant lower prices, with some local prices in the Mato Grosso region falling well below $2.00 USD per bushel this summer. Farmers are struggling to find anywhere to store their available crop that they refuse to sell.
Logistics in the nation’s largest corn growing regions remain problematic, while lower prices are making it less-and-less profitable to grow the crop. Conab has calculated the marketing year end will end with the largest corn stocks in the nation’s history – roughly 21.6 million tonnes.
Enter soybeans. Conab has projected a 2% to 5% decline in corn acreage, with many farmers turning to soybeans as a more profitable alternative.
Conab has stated in May that key corn-producing regions of Paraná, Rio Grande do Sul, and Bahia are the only areas where it can pay to grow the coarse grain.
Soybeans are guaranteeing profitability for all of the input costs, and that’s even with prices lower than what we saw last year.
Inventory Level Remain High
Conab also reported in recent weeks that soybean stocks would hit their highest level in 12 years. Total stocks for the 2016-17 year are forecasted to come in at 5.42 million tonnes. The agency goes on to say that crushing levels and exports will not be able to “give outflow of a record [crop] of more than 113 million [tonnes].”
Slow sales in Brazil were the story of the summer. Brazilian farmers were hoarding soybeans and hoping that higher prices would return. It was a massive game of the Prisoner’s Dilemma, and annual sales fell well below the pace of previous years.
Agrimoney noted on August 1 that farmers in Mato Grasso had sold 83.1% of their latest harvest. However, that figure was 8.3 percentage points behind the previous years.
Forward sales for the 2017-2018 crop were at just 9.5% on Aug. 1. That was well behind the 21.1% pace at the same time last year.
From an absolute volume perspective, this intuitively means that there are a lot of unpriced soybeans still laying around in Brazil.
Currency Challenges in Focus
While prices in Brazil are affected by a few things, the top influence is the fluctuations between the U.S. dollar and international prices. Conab noted that the global prices of soybeans increased by 1.75% over the first seven months of the year.
However, in Brazil, the weakening Real fueled a nearly 16% decline in domestic prices compared to the first seven months of 2016. This loss can be offset by an increase in international demand as buyers have more purchasing power.
As such, the weakening prices in the region may bolster soybean exports from Brazil.
But that will come at the detriment of other global exporters, fueling a decline in prices.
Despite the increase in soybean exports, the scenario isn’t so favorable to the farmer. Prices in the Brazilian soybeans market are influenced by several factors, such as freight prices, taxes, and administrative expenses.
Who Will Be Buying South American Soybeans?
The recent decision by the U.S. to place levies on Argentinean oils generated some headlines, but the production bump in China appears to have slid under the radar.
China is the world’s largest importer and the fourth-largest producer of soybeans. So, imagine the surprise that China realized that the world is awash in corn and decided to pull back from its massive production.
According to Oil World, Chinese production is expected to increase from 4 million metric tonnes in 2016-17 to a range of 16 million to 17 million metric tonnes. The announcement comes at a time that China already has a huge level of inventories thanks to its large purchases in recent months.
Brazil has already boosted its exports to China. In May, it reported that the total amount had doubled over compared to the previous year. However, one must ask if China’s large boost in production will slow down the exports levels, or will China reduce its purchase from the United States to accelerate deals with a local market desperate to get its grain off the docks?
How to Proceed Ahead of U.S. Harvest
Overall, we think that between heavy global stocks, fairly large production in both North and South America, soybean prices will remain subdued for the next 1 to 2 years.
There is always some cyclical premiums that creep into the market in November/December though. This is due to planting and weather premium from the South American crop.
Much like this past years, extended rallies are likely to be short-lived – think 2 to 4 weeks before pulling back.
This is what we saw in 2016/17 and the reason for the stalling was the size of ending stocks.
This isn’t just applicable to US soybean prices, but globally as well.
The one, “what if” factor that is still unclear is where the supply of biodiesel product will come from to make up for Argentinian products.
It’s easy to imply that it will all translate to more domestic crush of American soybeans but we don’t think that will be the case.
You should never look to sell during harvest off the combine – just fill pre-contracted bushels.
There is more likely to be better pricing opportunities before the end of 2017 but South America will ultimately determine how high (or low) they get.